Some investors might be reluctant to buy stocks in the bull market's 10th year due to concerns about valuations. However, plenty of high-quality stocks still trade at absurdly low valuations, and patient investors who buy them today might reap big profits over the long term. Today, a trio of our Motley Fool contributors will highlight three value plays in an aging bull market: Macy's (M 1.39%), General Mills (GIS -0.49%), and Markel (MKL 0.56%).
An iconic retailer with a 6% yield
Leo Sun (Macy's): Macy's lost about a quarter of its value over the past six months as its comparable-store sales decelerated and its gross margin contracted annually and sequentially during the crucial holiday quarter. However, that sell-off reduced Macy's forward P/E to 8, and it pays a hefty forward dividend yield of 6.1%.
Image source: Macy's.
Macy's has been gradually closing stores over the past two years, selling its prime real estate and leasing it back to cut costs, and expanding its e-commerce ecosystem with a wider range of products and faster delivery options. But despite those efforts, Wall Street expects Macy's revenue to stay flat this fiscal year (which started on Feb. 2) as its earnings tumble 26%.
The main problem is that the expansion of Macy's loyalty and e-commerce platforms are weighing down its near-term margins. Loyalty members get exclusive discounts, and its digital sales generate lower margins due to fulfillment expenses. Macy's also doesn't have much room to raise prices, since it aggressively competes with Amazon.com and Walmart.
Macy's turnaround isn't as aggressive as Walmart's, but it's still generating flat to slightly positive comps growth, and it still has other irons in the fire. Its Macy's Backstage off-price stores and Bluemercury beauty product stores are generating robust sales growth, it's shrinking down its massive stores, and its recent introduction of "narrative-driven" Story marketplaces (which feature community events and do-it-yourself stations from a wide range of brands) could bring shoppers back to its brick-and-mortar stores. These catalysts could enable Macy's to eventually mount a comeback, so investors who buy shares today could be well rewarded over the next few years.
Already showing progress
Reuben Gregg Brewer (General Mills): It might be a stretch to suggest that packaged food giant General Mills is absurdly cheap after a 30% stock price advance so far in 2019. But it's still trading below its five-year averages for price-to-sales, price-to-earnings, price-to-cash flow, and price-to-book value. The discounts on each vary, but the total sum of that information is that the stock still looks cheap today. Where it gets a little more exciting is the 3.8% dividend yield, which is toward the upper end of the company's historical range.
GIS dividend yield (TTM) data by YCharts.
There are two questions to look at from here: First, why is the stock relatively cheap today? The answer is that customers are shifting their buying habits and it's taken General Mills some time to catch up. And doing so has been something of a chore, involving shedding noncore assets (Green Giant), upgrading existing products (Yoplait yogurt), and buying new brands (Annie's and Blue Buffalo). The recent Blue Buffalo purchase was a particular issue because it was an expensive transaction, leading to a troubling rise in debt.
Second, why the rally? The company's turnaround efforts appear to be taking hold. There's more work to be done, as management readily admitted on its fiscal third-quarter conference call, but it was able to tout a leadership position in cereal, larger market share in yogurt, and continued success in increasing the reach of Blue Buffalo. And the company has reduced long-term debt by roughly $1 billion (8%) over the last four quarters. In other words, all of Mr. Market's concerns appear to be working out for the best. As long as that keeps happening, General Mills looks enticingly cheap even after a big rally.
Image source: Getty Images.
Take advantage of this dip while you can
Steve Symington (Markel): Markel shares have plunged around 20% since hitting their all-time high last fall, driven by a combination of the broader market's pullback in December with an ugly quarterly report from the specialty insurance and financial holding company two months ago.
But as I noted shortly after that report in February, Markel's quarter wasn't nearly as bad as it looked on the surface. While it incurred an comprehensive loss to shareholders of $680.4 million during the quarter, for example -- and keeping in mind that broader-market pullback -- those losses stemmed from declines in the fair value of stocks held in the company's enviable, long-term-oriented investment portfolio.
During the subsequent conference call, co-CEO Tom Gayner noted the company's equity investments indeed lost 3.5% over the course of 2018. But that's hardly indicative of their long-term performance, as the equity portfolio has still achieved annualized gains of 9.7% over the past five years.
"Obviously, I'm not thrilled to report negative returns to you for 2018," Gayner added. "But I do see them as reflecting normal and expected volatility that is the very warp and woof of financial markets. Fortunately, this is nothing new for us."
Meanwhile, as Markel patiently waits for the stock market to improve -- as it certainly has done so far in 2019 -- the company can lean on the relative strength of its insurance operations and its diversified group of acquired businesses under the Markel Ventures segment.
For investors who recognize that Market's recent results don't reflect the underlying strength of its business model, and with shares trading at a reasonable 1.49 times book value as of this writing, I think now is a great time to open or add to a position.
